Obama came into office promising to be a transformative president, and now he’s achieved his goal as credit rating agency Standard & Poor’s downgraded the United States’ credit rating for the first time in the history of the ratings. All the debt ceiling squabbling and all the histrionics of the past month were for what purpose?
The ratings organizations sent a message loud and clear: enact a plan to increase the debt ceiling while reducing the country’s debt by at least $4 trillion dollars; failure to do so would mean a credit rating reduction. Mr. Obama and the Congress did what they always do: they punted.
We now find ourselves in uncharted territory as the world’s leading economy now holds a less than perfect credit rating. Standard & Poor’s reduced the U.S. credit rating to AA-plus. The agency released the news late Friday stating that it was making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation. Everyone in the world except those on Capitol Hill heard Standard & Poor’s warning, but the debt ceiling deal did nothing to reduce the debt only slowing the growth over the next 10 years. Before the debt ceiling increase the national debt was $14.5 trillion; 10 years down the road, due to this landmark legislation, the debt will be $22 trillion with a debt to Gross Domestic Product (GDP) ratio of 94 percent. Anyone surprised by Standard & Poor’s move?
The Obama administration could only muster a sad comment that S&P’s analysis contained “deep and fundamental flaws.” Note to the President: this is what they do; when they tell you that you must reduce the debt by $4 trillion and you only manage to slow the growth of the debt by $917 billion it’s pretty much a “duh” moment. The United States debt to GDP ratio was 46 percent and rising when Mr. Obama took office and even if the new congressional committee meets its goal of an extra $1.5 trillion in debt reductions, we’re headed for a debt to GDP ratio that will make Athens, NY look a lot more like their sister city on the Mediterranean.
While Moody’s and Fitch both maintained the U.S.’s credit rating, many economists believe they will likely follow in the coming months; these three chief ratings agencies rate debt that is issued by governments and corporations. A triple-A rating is the highest possible and signifies an extremely low likelihood of default. Add to the U.S.’s woes is that all 3 agencies have raised concern or put the country on “watch” status for the next 18 to 24 months. If the trajectory doesn’t change further downgraded is possible.
So while the stock exchange has had the worst 2 weeks in recent history and Standard & Poor’s downgrades the national credit rating, what would you expect Mr. Obama to be doing? Heading off to Camp David, of course; deal done.
Fitch has warned the Congress that while their debt ceiling increase bill was an important first step, it clearly was not a solution. Fitch said on Tuesday that the bill was “not the end of the process.”
Moody’s responded to the bill with the statement, “While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested. Should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively.”
The people in leadership positions in Congress, based on their performance in the debt ceiling increase, aren’t likely to make real reductions in the nation’s debt and Moody’s and Fitch won’t look upon more partisan bickering in a positive light. Should Moody’s or Fitch move to lower the U.S. credit rating we’re staring into the abyss with potentially decades of mediocre economic performance; our children and grandchildren will have never know the America we grew up in.
Since 1917, when credit ratings were first assigned to governments, the U.S. has never received anything lower than the top rating. Now that the rating has been downgraded, higher interest rates are the likely outcome. With an economy on the edge, higher interest rates may well be the straw that sends the U.S. economy back into recession which would likely be far deeper than the recession of the past 3 years.
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